A scheme of arrangement in Germany is not a single statutory instrument but a family of court-supervised and out-of-court mechanisms that allow a debtor to restructure its obligations with binding effect on creditors. The most significant of these tools is the StaRUG preventive restructuring framework, introduced to align German law with the EU Directive on preventive restructuring. This guide explains how each mechanism works, who can use it, what creditors can expect, and how to navigate the process from initial assessment through plan confirmation.
Germany';s restructuring landscape is among the most sophisticated in continental Europe. Founders, lenders, and investors operating across borders need to understand how German law handles financial distress - whether they are seeking to protect a going concern, enforce a claim, or acquire distressed assets. The guide covers the StaRUG framework, insolvency plan proceedings under the Insolvenzordnung, and the relationship between German tools and the English scheme of arrangement that many cross-border transactions have historically relied upon.
The phrase "scheme of arrangement" originates in English company law and refers to a court-sanctioned compromise between a company and its creditors or shareholders. Germany has no direct statutory equivalent using that label. However, German law provides functionally comparable tools that achieve the same commercial objective: binding a dissenting minority of creditors to a restructuring plan approved by a qualified majority.
The two primary instruments are the StaRUG restructuring plan and the insolvency plan (Insolvenzplan) under the Insolvenzordnung (InsO). A third, less formal route is the out-of-court consensual restructuring, which lacks cram-down powers but avoids court involvement entirely. Each tool occupies a different position on the distress spectrum, and choosing the right one depends on the debtor';s financial condition, the complexity of its creditor base, and the urgency of the situation.
Foreign practitioners and investors familiar with English schemes often ask whether a German debtor can use an English scheme. Post-Brexit, English courts have become more cautious about asserting jurisdiction over companies with their centre of main interests (COMI) in Germany. In practice, a German company restructuring its German-law governed debt will almost always use German tools today.
The Unternehmensstabilisierungs- und -restrukturierungsgesetz, known as StaRUG, came into force as part of Germany';s implementation of the EU Preventive Restructuring Directive. It creates a pre-insolvency restructuring procedure available to companies that are not yet insolvent but face an imminent liquidity threat - typically defined as a likelihood of insolvency within the next 24 months.
StaRUG is a debtor-in-possession framework. The existing management retains control of the business throughout the process. There is no automatic appointment of an insolvency administrator. A restructuring officer (Restrukturierungsbeauftragter) may be appointed by the court in certain circumstances, but this is not the default position.
The core instrument is the restructuring plan (Restrukturierungsplan). The plan can affect financial creditors - lenders, bondholders, and holders of financial instruments - but it cannot be used to restructure trade creditors, employee claims, or pension obligations without their consent. This limitation is significant. A debtor with complex operational liabilities alongside financial debt may find StaRUG insufficient on its own.
Voting and cram-down under StaRUG
Creditors are divided into classes. Each class votes on the plan. A plan is approved if each class votes in favour by a three-quarters majority of the aggregate claims in that class. If one or more classes vote against the plan, the court can still confirm it through a cross-class cram-down, provided the plan does not leave dissenting creditors worse off than they would be in a liquidation scenario and the plan is supported by a majority of classes.
The court';s role under StaRUG is supervisory rather than administrative. The debtor files the plan with the restructuring court (Restrukturierungsgericht), which is a specialist division of the local district court (Amtsgericht). The court can grant a stay of individual enforcement actions for up to three months, extendable in certain circumstances. This moratorium is a powerful tool for creating breathing room during negotiations.
Practical scenarios under StaRUG
Consider a mid-sized German manufacturer with a syndicated loan facility and a revolving credit facility. The company is current on payments but its financial projections show a covenant breach within six months. Management files a restructuring notification with the Restrukturierungsgericht, activates the moratorium, and presents a plan that extends maturities and reduces the interest margin. Lenders holding 80 percent of the debt by value vote in favour. The dissenting 20 percent are crammed down. The company avoids formal insolvency and continues trading without interruption.
A second scenario involves a holding company with a complex capital structure including senior secured notes, mezzanine debt, and shareholder loans. StaRUG allows the plan to differentiate between these classes, converting mezzanine debt to equity while leaving senior debt largely intact. This kind of structural flexibility is one of StaRUG';s most commercially attractive features.
If your company is approaching financial distress and you are evaluating whether StaRUG is the right tool, contact us at info@vlolawfirm.com. We can help structure the setup correctly the first time.
The insolvency plan (Insolvenzplan) under the InsO is Germany';s most powerful restructuring tool. Unlike StaRUG, it is available only once formal insolvency proceedings have been opened. It is the closest German equivalent to a Chapter 11 reorganisation plan in US law or a scheme of arrangement in English law, in terms of its scope and binding effect.
Once insolvency proceedings are opened, the debtor or the insolvency administrator submits a plan to the insolvency court. The plan can affect all creditors, including trade creditors, employees (subject to statutory protections), and secured creditors. This comprehensive scope makes the insolvency plan more powerful than StaRUG for operationally complex restructurings.
The insolvency plan procedure step by step
The process begins with the filing of an insolvency petition. The debtor may file voluntarily or creditors may file. The court appoints a preliminary insolvency administrator (vorläufiger Insolvenzverwalter) to assess the debtor';s assets and liabilities. This preliminary phase typically lasts four to eight weeks.
Once proceedings are formally opened, the insolvency administrator takes control of the debtor';s assets. In a self-administration (Eigenverwaltung) proceeding under section 270 InsO, the debtor retains management control under the supervision of a custodian (Sachwalter). Self-administration is the preferred route for plan-based restructurings because it preserves management continuity and reduces the disruption of an external administrator taking over.
The plan itself has two parts: the descriptive part (darstellender Teil) sets out the debtor';s financial position and the proposed measures; the operative part (gestaltender Teil) specifies the legal changes to creditor rights. Creditors are grouped into classes. Voting follows a dual majority requirement: more than half the creditors by number and more than half by aggregate claims in each class must approve. If a class votes against, the court can apply a cram-down if the dissenting class is not worse off than in liquidation and the plan is approved by the majority of classes.
Protective shield proceedings (Schutzschirmverfahren)
A notable variant is the protective shield proceeding under section 270b InsO. A debtor that is not yet insolvent but is over-indebted or faces imminent insolvency can apply for a protective shield. The court grants a stay of up to three months during which the debtor prepares an insolvency plan under self-administration. The protective shield is a signal to the market that the company is restructuring proactively rather than collapsing. It is often used by larger companies with significant brand value or ongoing customer relationships that would be damaged by a conventional insolvency.
Costs and timelines for insolvency plan proceedings
Formal insolvency proceedings are more expensive and time-consuming than StaRUG. Court fees, administrator fees, and professional advisory costs together represent a material expense. For mid-market companies, total professional fees often run into the mid-to-high six figures in EUR, and for larger restructurings into the millions. Timelines from petition to plan confirmation typically range from six to eighteen months, depending on complexity and the cooperation of creditors.
Not every financial difficulty requires court involvement. German law permits fully consensual out-of-court restructurings, sometimes called "London Approach" workouts or bank-led restructurings. These involve the debtor negotiating directly with its key creditors - typically its lending banks - to agree on amended terms without any court process.
The advantage of a consensual restructuring is speed and confidentiality. There is no public filing, no court record, and no mandatory disclosure to trade creditors or employees. For companies where reputational risk is high, this is often the first route explored.
The fundamental limitation is that a consensual arrangement binds only those creditors who agree to it. A single holdout creditor can refuse to participate, continue to enforce its claims, and potentially trigger a formal insolvency. This holdout problem is precisely what StaRUG and the insolvency plan are designed to solve. In practice, out-of-court restructurings work best where the creditor base is small and concentrated - for example, a company with two or three relationship banks and no public debt.
Intercreditor dynamics in German restructurings
German restructurings frequently involve intercreditor agreements that govern the relative priority of different lender groups. Senior secured lenders, mezzanine lenders, and junior creditors each have different rights and different incentives. A common mistake made by foreign creditors is to assume that German insolvency law will automatically respect the contractual priority waterfall agreed in an intercreditor agreement. In practice, the InsO has its own priority rules, and the interaction between contractual subordination and statutory priority requires careful analysis.
Another non-obvious requirement is the treatment of related-party claims. Shareholder loans are automatically subordinated in German insolvency proceedings under section 39 InsO. A foreign parent that has extended loans to a German subsidiary should be aware that those loans will rank behind all other unsecured creditors in an insolvency. This can have significant implications for group restructurings where the parent is also a creditor.
Many German companies have cross-border operations, foreign subsidiaries, or debt governed by English or New York law. The interaction between German insolvency law and foreign legal systems is governed primarily by the EU Insolvency Regulation (Recast), which applies as between EU member states, and by the UNCITRAL Model Law on Cross-Border Insolvency, which Germany has not formally adopted but which influences judicial practice.
The concept of COMI - centre of main interests - determines which member state';s courts have jurisdiction to open main insolvency proceedings. For a German company with its registered office and head office in Germany, COMI will almost always be in Germany. Main proceedings opened in Germany have automatic recognition across the EU.
COMI migration and its limits
Some debtors have historically considered migrating their COMI to another jurisdiction - most commonly England - to access the English scheme of arrangement. Post-Brexit, England is no longer an EU member state, and English schemes no longer benefit from automatic recognition across the EU. This has substantially reduced the attractiveness of COMI migration for German debtors. German courts have also become more willing to scrutinise COMI migration and to challenge the recognition of foreign proceedings where the migration appears to be a restructuring tactic rather than a genuine change of business location.
In practice, a German company with German-law governed debt, German operations, and German creditors should expect to restructure in Germany using German tools. Cross-border elements - such as English-law governed bonds or foreign subsidiary guarantees - can be addressed within a German plan, but require careful coordination with foreign counsel.
Practical scenario: cross-border group restructuring
Consider a German holding company with operating subsidiaries in Germany, the Netherlands, and Poland, and a EUR 300 million bond governed by English law. The group faces liquidity pressure. German counsel and English counsel work together to assess whether a StaRUG plan can bind the bondholders. The answer depends on whether the bond indenture contains a governing law clause and whether the bondholders'; rights are sufficiently connected to Germany. In many cases, a parallel process - StaRUG in Germany and a recognition application in the relevant foreign courts - is the most reliable approach.
For complex cross-border restructurings involving German entities, contact us at info@vlolawfirm.com. We can assist with documents, filings, and coordination across jurisdictions.
Creditors in German restructuring proceedings have substantial procedural rights. Under StaRUG, creditors must be notified of the plan and given adequate time to review it before voting. The court will refuse to confirm a plan that does not meet the minimum protection standard - creditors must receive at least as much as they would in a liquidation.
Under the InsO, creditors'; committees (Gläubigerausschuss) play an important supervisory role. The committee, composed of representatives of major creditor groups, oversees the insolvency administrator and can influence key decisions such as the sale of business units or the terms of a plan. Secured creditors have the right to separate satisfaction (Absonderungsrecht) from the proceeds of their collateral, subject to a contribution to the general estate for the costs of realisation.
Challenging a plan: grounds and procedure
A creditor who believes a plan is unfair can challenge it before the insolvency court. The main grounds for challenge are: the creditor is placed in a worse position than in liquidation; the plan discriminates unfairly between creditors in the same class; or the plan was procured by fraud or misrepresentation. The court will examine these objections before confirming the plan. In practice, challenges are relatively rare because the cram-down protection - the "no worse off" test - provides a meaningful floor.
One area where creditors frequently underestimate their exposure is the treatment of set-off rights. German insolvency law restricts the exercise of set-off in certain circumstances, particularly where the creditor acquired the right to set off within the suspect period before insolvency. Foreign creditors with netting arrangements should review these carefully before relying on them in a German insolvency.
What is the main difference between StaRUG and the insolvency plan in Germany?
StaRUG is a pre-insolvency tool available to companies that are not yet formally insolvent but face an imminent threat. It can only affect financial creditors and cannot be used to restructure trade debt or employment claims without consent. The insolvency plan under the InsO is available only after formal insolvency proceedings have been opened, but it has a much broader scope - it can bind all creditor classes, including trade creditors and secured lenders, subject to the statutory protections. StaRUG is faster and less disruptive to operations; the insolvency plan is more comprehensive but carries the reputational and operational costs of formal insolvency. The choice between them depends primarily on the debtor';s financial condition and the composition of its creditor base.
How long does a German restructuring process typically take, and what does it cost?
A StaRUG process, from initial filing to plan confirmation, can be completed in as little as two to four months for straightforward cases with a cooperative creditor base. More complex cases with contested cram-downs may take six to nine months. Formal insolvency plan proceedings typically take six to eighteen months. Professional fees vary significantly by complexity. For StaRUG, advisory costs for a mid-market company often fall in the range of several hundred thousand EUR. For formal insolvency proceedings, total costs including administrator fees, legal fees, and court charges are substantially higher. State fees and court charges are set by statute and vary by the size of the estate, but they represent a smaller proportion of total cost than professional advisory fees.
Can foreign creditors participate in German restructuring proceedings, and are foreign judgments recognised?
Foreign creditors have the same rights as German creditors in German insolvency proceedings. They must file their claims with the insolvency administrator within the prescribed period - typically a matter of weeks from the public announcement of proceedings. Failure to file on time does not extinguish the claim but may result in the creditor being excluded from voting on the plan. Within the EU, German insolvency proceedings are automatically recognised under the EU Insolvency Regulation. Outside the EU, recognition depends on bilateral treaties or the domestic law of the relevant country. Foreign creditors holding security over German assets should take local advice promptly on the enforcement implications of German insolvency proceedings.
Germany';s restructuring toolkit - anchored by StaRUG and the insolvency plan - gives debtors and creditors a range of court-supervised mechanisms that achieve outcomes comparable to a scheme of arrangement in other jurisdictions. The choice of tool depends on the debtor';s financial condition, the scope of creditor classes to be affected, and the urgency of the situation. Cross-border elements add complexity but are manageable with coordinated advice.
VLO Law Firms advises international clients on bankruptcy and restructuring matters in Germany. We can assist with StaRUG filings, insolvency plan preparation, creditor representation, and cross-border coordination. To request a consultation, contact: info@vlolawfirm.com